Report notes potential economic disruption of Brexit and leaving rainy day fund short

The Dáil’s independent budget watchdog has criticised the recent budget for spending too much and not allocating enough money to the so-called “rainy day fund”.

The Parliamentary Budget Office (PBO) has also said that the Government may not have factored the economic disruption of a disorderly Brexit into its forecasts.

In a note to members of the Dáil Budgetary Oversight Committee, it has raised concerns about the sustainability of the tax base and it highlights the reliance on corporation tax.

It also says that better financial management is needed, and notes the €700 million health overspend for 2018, which was partially covered by larger than expected corporation tax receipts.

Good economic policy, it says, should be “counter cyclical”.

“Economic fluctuations will occur, however the onus is on Government to use fiscal policy in a way that attempts to smooth the business cycle,” it says. “Optimal principles of fiscal management suggest that budgetary policy should be counter-cyclical.

“This means supporting the economy through higher public spending when it is in a recession and attempting to cool it down by increasing taxes and/or reducing spending if the economy is overheating.

“The Government has identified as a key policy objective the need to avoid the pro-cyclical fiscal policies of the past.”

It says that Budget 2019 – introduced earlier this month by Minister for Finance Paschal Donohoe, with the acquiescence of Fianna Fáil – “while appearing to be in line with the EU fiscal rules, could be considered to be pro-cyclical.

“Additional revenue in 2018 – mainly but not exclusively from unexpectedly high corporation tax receipts – is being used to fund additional voted current expenditure, mostly health expenditure.”

It further added that “there is little evidence that a counter-cyclical fiscal stance has been pursued in Budget 2019”.

Assumption

It also says that the forecasts underpinning the budget “are based on the assumption of an ‘orderly’ Brexit” which would see “a transition period . . . maintained until end-2020 with a subsequent trade agreement between the UK and the EU entering into force thereafter”.

“However, the PBO would emphasise that there remains considerable uncertainty regarding the nature of the future relationship between the UK and the EU, and the negotiations in respect of this future relationship. For this reason, it may not be prudent to plan on the basis of an ‘orderly’ Brexit.”

On the larger than expected corporation tax receipts – up €2.67 billion on forecasts from earlier this year – the PBO indicates that more should have been put into the “rainy day fund”.

It says the “Government has indicated that some windfall revenue would be set aside for allocation to the rainy day fund” but the allocations to the fund from earlier this year were not increased come budget day.

“This means that the rainy day fund is not being used as a counter-cyclical policy tool,” it adds.

The fact that there were no moves to increase carbon or fuel taxes has also been criticised.

“In addition, there were no changes to motor taxation and a small change related to VRT [vehicle registration tax] on diesel cars. This appears to be a missed opportunity to rebalance tax revenue away from income tax and address the identified fiscal risk of missing EU climate change and renewable energy targets.”

The PBO was established in recent years to independently assess budgetary policy. It provides independent and impartial information, analysis and advice to the Houses of the Oireachtas.